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On 21 August, the share price of WH Smith (LSE:SMWH), the FTSE 250 travel retailer, tanked 42% after it uncovered a problem with its US finance team. Instead of recognising income from its suppliers as it was earned, the division had been booking rebates and discounts in its accounts too early. As a consequence, it was overstating earnings.
Understandably, head office immediately launched an investigation. Today (19 November), it updated investors on the findings. In short, £20m of income in its current financial year (31 August) has now been deferred to later periods and £12m has “not been delivered due to delays”.
Before any of these problems were identified, the group was expecting a headline trading profit of £55m from its North American business. Today, the estimate has been revised downwards to £5m-£15m.
Not good enough
The group’s acknowledged that there were insufficient controls in place. It’s also described a “backdrop of a target-driven performance culture”. WH Smith’s chief executive is leaving the business.
Early indications are that investors don’t really know what to make of all this. By 10.30am today, the group’s share price was up around 3.5%. But during the first two hours of trading, it’s been all over the place.
What we do know is that WH Smith’s now expecting to make a headline trading profit of £100m-£110m this year. And that the accounting issues are principally a timing issue. The group’s still entitled to most of the income but it’s previously been recorded too soon.
The situation is particularly disappointing given that the group’s bounced back strongly (or so we thought) from the pandemic. Over the past three years, the headline profit from its travel business has been £89m (2022), £164m (2023) and £189m (2024). However, today’s statement cautions that there may need to be some revisions to these figures.
Looking to the future
But let’s forget about all this, wipe the slate clean, and look at whether it would be a good idea to consider taking a stake now.
It’s unclear what its earnings per share are likely to be this year but based on the group’s current market cap of approximately £775m, it’s trading at around 7.4 times its forecast headline trading profit.
Go back three months – just before its accounting problems were uncovered — and it was valued at 7.4 times its 2024 earnings. This puts a different perspective on the group’s share price. It suggests that all of the bad news has been factored in to its current stock market valuation. It might not be a bargain but it’s not over-priced either.
This tells me that if the group can grow as anticipated then its share price should also go in the right direction. It reckons passenger numbers in the travel retail market will increase 2.5 times by 2050.
The stock could also appeal to income investors. After the recent share price fall, it’s now yielding 5.7%. Of course, its payout may be in jeopardy with lower forecast earnings. We will know more on 16 December when the group’s due to release its interim results.
On balance, although it may take time for investor confidence to be fully restored, I think WH Smith could be a stock for long-term investors to consider.
